Economics 9708/43 October/November 2023: question paper and mark scheme
Cambridge AS & A Level Economics (9708), Paper 4 Data Response and Essays, October/November 2023. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
The decline of South Africa’s economy
South Africa is the most industrialised country in the continent of Africa but it is also an economy with much economic inequality.
Recently governments in South Africa have aimed to reduce economic inequalities by redistributing incomes and increasing both job and investment opportunities for all sections of society.
Unfortunately, the reforms have been undermined through poor organisation and management.
State railways, port facilities, airways and electricity production have been affected.
Government statistics for the first quarter of 2020 show that South Africa’s economy contracted by 3.2%, the biggest quarterly decline of actual economic growth in a decade (see Fig. 1.1).
Gross domestic product (GDP) per capita was US$6130 in December 2019, 5.8% lower than in
December 2018.
4
3
2
% change 1 in GDP 0 per year
–1
–2
–3
–4
2008 2010 2012 2014 2016 2018
Fig. 1.1 South Africa annual growth rate, 2008 to 2019
This economic decline is reflected in the electricity supply industry, which is a state-owned monopoly. It is struggling to survive mainly due to mismanagement. For several months it rationed electricity consumption and introduced regular power cuts for households and industries. The rationing policy led to decreases in production and increases in unemployment. The company’s debts added significantly to South Africa’s current national debt to GDP ratio of 56% and are seen as the biggest threat to the economy.
Further evidence of economic difficulties can be found in the mining industry, a significant part of
South Africa’s economy. A controversial reform was introduced to give more equality of ownership.
Already facing rising costs and growing bureaucracy, many mining firms, including multinational companies, stopped investing altogether which reduced potential economic growth. The mining industry declined. Thousands of jobs were lost despite South Africa having significant deposits of platinum, gold and iron ore.
For South Africa’s economy to grow it needs to address major infrastructure issues. Also, in disadvantaged communities the education system is weak contributing to a skills shortage and a rise in the unemployment rate to 27% (see Fig. 1.2). Increased production is further hindered by restrictive trade union practices.
28
27 unemployment
26 rate %
25
24
23
2009 2011 2013 2015 2017 2019
Fig. 1.2 South Africa’s unemployment rate
3.50
3.00
2.50
2.00
% of GDP
1.50
1.00
0.50
0
2009 2011 2013 2015 2017
Fig. 1.3 South Africa’s foreign direct investment (FDI) net inflows
An analyst said: ‘A critical reason for low economic growth has been a lack of private sector investment and FDI (see Fig. 1.3). The lack of investment wasn’t just due to the political policies but also to uncertainty and mismanagement which led to continued inequalities.’
Sources: The Daily Telegraph, 6 July 2019 and ceicdata.com
(a) Describe what is meant by economic equality and distinguish it from equity. [3]
(b) Define what is meant by actual economic growth and analyse the relationship between economic growth and unemployment as illustrated by Fig. 1.1 and Fig. 1.2. [5]
(c) Assess the evidence provided about the significance of the performance of the state-owned electricity monopoly as a contributor to the decline in South Africa’s economy. [5]
(d) Evaluate whether attracting investment and managing uncertainty are the most effective ways to improve the prospects for South Africa’s economy. [7]
Section B
Answer one question.
EITHER
Mark scheme
1(a) Describe what is meant by economic equality and distinguish it from 3
equity.
Economic equality is the equal distribution of income, wealth and
opportunities between across all sectors of society. This could affect job
prospects, earnings, education. (2)
Equity is fairness/justice/any relevant comment (2)
Up to maximum 3
1(b) Define what is meant by actual growth and analyse the relationship 5
between growth and unemployment as illustrated by Fig. 1.1 and Fig.
1.2.
Actual economic growth is measured by the percentage change in a country's
real national output (GDP) (1) in a period of time (1).
General trend: employment fluctuates but there is a general rising trend. (1).
declining rates of growth are linked with increasing levels of unemployment or
there is an inverse relationship between growth and unemployment (1)
Specifically: negative rates of growth in GDP (depression) correspond to
highest levels of unemployment (1) The general growth trend is falling (1)
Up to maximum 5
1(c) Assess the evidence provided about the significance of the performance 5
of the state-owned electricity monopoly as a contributor to the decline in
South Africa’s economy.
Electricity supply is fundamental to the functioning of an economy. The
company has been unable to meet national demand for electricity and has
used power cuts to ration consumption. (1)
Article mentions other industries in decline but states that the electricity
company is the biggest threat. (1)
Lack of electricity has had an effect on the outputs of mining and
manufacturing that have led to unemployment. (1)
General uncertainty has led to reduced investment and has also contributed
to the situation that South Africa’s actual growth is well below its potential
growth in view of its well-endowed natural resources. (1)
No similar figures for the other industries so a definite conclusion about the
exact significance of the electricity industry is not possible. (1)
The company’s debts added significantly to South Africa’s national debt (1)
Up to maximum 5
1(d) Evaluate whether attracting investment and managing uncertainty are 7
the most effective ways to improve the prospects for South Africa’s
economy.
Various government reforms and poor performances of some state industries
have undermined confidence in the entire South African economy. (1)
This can be illustrated by the lack of investment by the private sector in the
mining industry leading to increasing unemployment. (1)
The South African economy has also been diminished in the international
economy as indicated by the fall in FDI (Figure 3) (1)
High unemployment means low consumer expenditure and low growth in AD.
(1)
Future prospects for improvement seem limited in the short run (1). Longer
term it needs to overcome a skills shortage by reforming education (1) and
restrictive trade union practices. (1) Nevertheless, there is some increase in
FDI (1). Longer term increase in infrastructure (1). An increase in
employment/economic growth in the economy (1)
EITHER
Pollution is caused when consumers or producers make decisions based on self-interest. This is a sign of market failure.
With the help of a diagram, evaluate the extent to which government policies should rely upon market forces to address this market failure. [20]
OR
Mark scheme
2 Pollution is caused when consumers or producers make decisions 20
based on self-interest. This is a sign of market failure.
With help of a diagram evaluate the extent to which government policies
should rely upon market forces to address this market failure.
Use Table A: AO1 Knowledge and understanding and AO2 Analysis and
Table B: AO3 Evaluation to mark candidate responses to this question.
AO1 and AO2 out of 14 marks. AO3 out of 6 marks.
Indicative content
Responses may include:
AO1 Knowledge and understanding and AO2 Analysis
• An explanation of the link between pollution and market failure.
• Recognition that pollution can be caused by production or consumption.
• Explanation of negative externalities
• Use of a diagram to analyse the links between negative externalities and
market failure.
• Analysis of how market forces can be used to solve the problem of
market failure, caused by negative externalities.
2 AO3 Evaluation
• Private firms are likely to aim for profit maximisation and this might lead to
these firms focusing upon private costs and ignoring social cost.
• The use of taxation to influence price and output is unlikely to remove all
market inefficiency because it is very difficult to measure the correct
amount of taxation that should be applied.
• The use of minimum prices would only be partially effective and might
have significant effects on firm’s profits and employment.
• Alternatives to the use of the price mechanism might, in some
circumstance, allow a government to achieve a more precise control of
negative externalities. For example, through the use of a complete ban of
consumption/production.
• A conclusion should be attempted which examines the net benefits of
each alternative i.e. through direct government intervention or through the
use of market forces.
Also, the impact on price and output in some circumstances takes a long
time to become effective.
• Advertising is often costly and it is not always certain that it will have a
sufficiently persuasive effect to ensure the correct level of
output/consumption is reached.
• It is possible to show that government intervention can reduce the level of
inefficiency caused by the existence of negative externalities but it is not
clear whether the net effect of government intervention will always be
positive. Some types of intervention will be more effective than others
depending on the nature of the good/service under consideration.
Accept all valid responses.
AO1 Knowledge and understanding and AO2 Analysis 14
AO3 Evaluation 6
OR
Evaluate the view that monopolistically competitive firms will always charge lower prices and operate more efficiently than a monopoly firm. [20]
Section C
Answer one question.
EITHER
Mark scheme
3 Evaluate the view that monopolistically competitive firms will always 20
charge lower prices and operate more efficiently than a monopoly firm.
Use Table A: AO1 Knowledge and understanding and AO2 Analysis and
Table B: AO3 Evaluation to mark candidate responses to this question.
AO1 and AO2 out of 14 marks. AO3 out of 6 marks.
Indicative content
Responses may include:
AO1 Knowledge and understanding and AO2 Analysis
• Characteristics of a monopolistically competitive market should be
described.
• Difference between short run and long run profit maximizing output in
monopolistically competitive markets.
• A monopoly market should be described, including main characteristics
and key difference between this type of market and monopolistic
competition i.e. barriers to entry.
• Different types of efficiency should be identified and explained.
• Analysis should discuss the links between monopoly and higher prices
and inefficiency. This analysis can then be used to compare both
monopoly and monopolistically competitive markets.
• Analysis should then be used to compare short run and long run
outcomes on both types of market.
AO3 Evaluation
• Some monopolies might invest in new technology and achieve dynamic
efficiency. This will enable lower average total costs and an opportunity to
pass the benefits of lower costs on in the form of lower prices.
• Similarly, monopolies might benefit from economies of scale which might
also lead to lower prices.
• Monopolistically competitive firms might incur additional costs through the
need to engage in non-price competition. This might lead to higher prices.
• Monopolistically competitive firms will achieve productive efficiency in the
long run but a profit maximizing firm will not operate at an allocatively
efficient level of output.
• A conclusion should attempt to address each element of the statement by
addressing both price levels and efficiency outcomes in relation to both
types of market structure. The key word ‘always’ should be considered in
the light of the preceding argument.
Accept all valid responses
AO1 Knowledge and understanding and AO2 Analysis 14
AO3 Evaluation 6
EITHER
With the help of a diagram, assess the effectiveness of using fiscal policy to close a negative output gap in an economy [20]
OR
Mark scheme
4 With the help of a diagram, assess the effectiveness of the use of fiscal 20
policy to close a negative output gap in an economy.
Use Table A: AO1 Knowledge and understanding and AO2 Analysis and
Table B: AO3 Evaluation to mark candidate responses to this question.
AO1 and AO2 out of 14 marks. AO3 out of 6 marks.
Indicative content
Responses may include:
AO1 Knowledge and understanding and AO2 Analysis
• Fiscal policy would require a government to use taxation and government
expenditure changes to influence key macroeconomic goals such as
inflation, economic growth and the level of employment.
• An output gap will show the difference between the actual output of an
economy and its potential output.
• A negative output will indicate that there is spare capacity in an economy
which will be primarily due to insufficient aggregate monetary demand. A
relevant diagram can be used to illustrate this gap.
• Analysis can be used to show how a government will be able to
significantly influence aggregate demand by either increase its
expenditure or reducing the overall level of taxation.
• A budget deficit will inject additional demand into an economy which will
have a magnified effect on output, income and employment due to the
positive contribution of a multiplier effect.
4 AO3 Evaluation
• Fiscal policy could help to close a negative output gap by increasing a
government’s budget deficit but this may lead to higher interest rates and
crowding out in the private sector.
• It is difficult for a government to produce an accurate forecast of the
magnitude of the output gap.
• Although a budget deficit might help to reduce a negative output gap in
the short run, if the deficit is financed by increasing the money supply,
this might lead to inflation in the long run.
• Alternative policies such as supply-side policies might be more effective
by closing the output gap while avoiding the risk of inflation in the long
run.
• Expansionary fiscal policies used to close an output gap might lead to an
increase in the demand for imports and subsequently, a negative impact
on the country’s balance of payments.
• While the long-run impact on the current account is dependent upon
respective export/import price elasticities of demand, it is also important
to recognise that if raw materials such as oil constitute a significant
proportion of the value of imports then the price elasticity of demand for
imports is likely to be low.
• The long-run impact on inflation will be influenced by the current state of
the economy when the devaluation takes place. For example, if there is a
significant amount of spare capacity, the effect on Aggregate Demand of
a lower price of exports might be limited.
• It could also be noted that a government which chooses to use a policy of
devaluation is perhaps prioritising the need to correct a balance of
payments disequilibrium at the possible expense of other key
macroeconomic goals such as controlling inflation.
• Based on the evidence/analysis provided, it is not clear whether a
devaluation of the currency will solve a persistent current account deficit
in either the short run or the long run. Similarly, the impact on the general
price level will depend on a number of variables which are difficult to
predict or measure accurately.
Accept all valid responses.
AO1 Knowledge and understanding and AO2 Analysis 14
AO3 Evaluation 6
OR
Assess the impact of international aid on the standard of living in low-income countries. [20]
Mark scheme
5 Assess the impact of international aid on the standard of living in low- 20
income countries.
Use Table A: AO1 Knowledge and understanding and AO2 Analysis and
Table B: AO3 Evaluation to mark candidate responses to this question.
AO1 and AO2 out of 14 marks. AO3 out of 6 marks.
Indicative content
Responses may include:
AO1 Knowledge and understanding and AO2 Analysis
• Aid can be defined as any assistance given to a country that would not be
provided through normal market forces.
• There are two main types of aid, humanitarian aid; development aid.
Development aid would include many different types including: long term
loans; tied aid; bilateral aid and multilateral aid.
• Key characteristics of low-income countries would include: low levels of
productivity; high dependency ratios; low GDP per capita; significant
dependence on producing and exporting primary goods.
• Low living standards are generally associated with: high poverty levels;
inequality; poor housing, education and health; and rapid population
grow.
• Aid that focuses on the provision of new technology, building new
factories and training the work force is likely that productivity, output,
employment and income levels will rise.
• Aid can increase real wealth and higher levels of tax revenue are likely to
be received by a low-income country’s government. This will enable more
expenditure on health, housing and education as well as increased
access to more consumer goods. These improvements are generally
associated with a rise in the standard of living.
5 AO3 Evaluation
• The links between an increase in aid and an increase in living standards
are not clear. Sometimes aid only reaches a relatively small section of the
population. For example, due to corruption.
• Different types of aid might produce different outcomes. For example, aid
in the form of long-term loans might make it more difficult for low-income
countries to escape the cycle of poverty.
• Aid is sometimes given for political reasons rather than the low-income
countries where the need is the greatest.
• Tied aid might mean that low--income countries receiving such aid have
to purchase goods and services from the donor country which are more
expensive.
• Long term dependency upon aid might lead to a welfare mentality and
reduce levels of innovation in the low-income country.
• A conclusion might attempt to form an overall judgement on the short
term and long-term efficacy of development aid in relation to the
improvement of living standards in low-income countries.
Accept all valid responses.
AO1 Knowledge and understanding and AO2 Analysis 14
AO3 Evaluation 6
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Economics 9708/43 for October/November 2023 is out of 60 marks, with 2 hours to answer it.
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